The company cost of capital, pretax for a firm with a 60/40 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be:

Question

Quizplus · Accepted Answer

The formula to calculate the company cost of capital is:

(Cost of Debt x % of Debt) x (1 - Tax Rate) + (Cost of Equity x % of Equity)

Plugging in the given numbers:

(0.08 x 0.6) x (1 - 0.35) + (0.15 x 0.4) = 0.0108 or 10.80%

Therefore, the best choice is C.

The Company Cost of Capital, Pretax for a Firm with a 60/40